Trading is like riding an exciting and nerve-wracking roller-coaster that is why it requires a lot of self-control and discipline. That is why trading psychology is as important as other attributes such as knowledge, experience and skill in determining trading success.
Trading psychology refers to the emotions and mental state that help to dictate success or failure in trading. Trading psychology represents various aspects of an individual’s character and behaviors that influence their trading actions. Traders develop certain traits, which in turn allow them to implement a strategy effectively, in all market conditions.
Discipline, Rules and Ratio
While discipline is the key, rules are very important in trading. Keeping a trader’s diary will help to set up rules for trading. Write down all successes and failures, describe and analyze in detail and it will help to avoid mistakes in future. Traders require the discipline to do nothing when there are no opportunities present but must still stay alert for potential opportunities. Then, they need the discipline to act instantaneously when trading opportunities occur. If you are not disciplined, your trading will turn into gambling, and it will not end well.
Patience and Steadiness
Patience is important. Traders require patience in waiting for their ideal entry and exit points—based on their strategy—but when the moment calls for it, they need to act swiftly. There is a constant seesaw between prolonged periods of patience, followed by split-seconds of action, which are then followed by patience, and so on.
The difference between a successful trader and an unsuccessful one is that most successful traders win slightly more on their winners than they lose on their losers and typically win slightly more often than they lose.
Traders must stay focused and rational through a losing streak and not let the loss of capital affect their judgment—which will make matters worse. It requires mental toughness to stay focused on executing your trading plan and realize when the market isn’t providing you with good opportunities for your strategy.
Confidence and Independence
Eventually, traders must develop a sense of independence, no longer relying on others. Most traders choose this path because they find it to be the most profitable. Once you have a trading method that works for you, you don’t want other people’s opinions. You do what works for you, and that is that.
Some traders learn independence the hard way when they bounce from mentor to mentor, or trading book to trading book, always feeling like they are missing something. Or the service they subscribe to shuts down, and now they have no idea how to trade because they relied too heavily on someone else. If you develop independence, taking responsibility early on for your education, profits, and losses, you won’t have these problems down the road.
Goal-Oriented and Positive
Never get stuck in the past. While day traders use data from the past to help them make trading decisions, they must be able to apply that knowledge in real-time. Like a chess master, traders are always planning their next moves, calculating what they will do based on what their opponent (the market) does.
As discussed in the adaptability section, the markets are not static. We can’t say we will buy at a certain price in five minutes, and then ignore all the price information that occurs during those five minutes. Day traders are constantly planning their next action, based on new price information they receive every second. They consider different scenarios that could play out and then plan out how they will implement their trading plan (entries, stop loss, targets, trade management, position size) under each of those various conditions.
Calculated Risk and Informed Decisions
The trader must understand that he has no control over losses. Unprofitable deals accompany anyone and cannot be avoided. When opening a trade, a trader always takes risks and this is quite normal. Only the excess of risk is abnormal. A professional always determines the risk that he is willing to bear in the event of a wrong forecast. Having determined the maximum allowable amount that can be risked in a particular trade, the trader should in no way exceed it. When you see a potential trade that will require you to exceed your risk tolerance, even by a couple of cents, you should skip it.
Most traders develop the successful traits during their career. Everybody can learn these traits, which is a positive thing because it means successful day trading is determined by you and not necessarily your genes. Some of us are prone to certain weaknesses, but we can offset these with strengths, which can help us mitigate the damage of our weaker qualities.
Take a personal inventory of what qualities you need to work on and what your strengths are. Ideally, take this inventory based on trading experience, since trading tends to expose vulnerabilities and strengths we didn’t know we had. The personal inventory requires looking at your discipline, patience, adaptability, mental-toughness, independence, and forward-thinking.